Fighting to end destructive double taxation

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Double Taxed is the official website for the Double Taxation Working Group, a project of the Coalition for Tax Competition. Our mission is to eliminate instances of double taxation, including death, capital gains and dividends taxes.

But I no longer give that advice. I’m worried he might actually do it. And even though Buffett is wildly misguided about fiscal policy, I know he will invest his money much more wisely than Barack Obama will spend it.

Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.

His numbers are flawed in two important ways.

1. When Buffett receives dividends and capital gains, it is true that he pays “only” 15 percent of that money on his tax return. But dividends and capital gains are both forms of double taxation. So if he wants honest effective tax rate numbers, he needs to show the 35 percent corporate tax rate.

Moreover, as I noted in a previous post, Buffett completely ignores the impact of the death tax, which will result in the federal government seizing 45 percent of his assets. To be sure, Buffett may be engaging in clever tax planning, so it is hard to know the impact on his effective tax rate, but it will be signficant.

2. Buffett also mischaracterizes the impact of the Social Security payroll tax, which is dedicated for a specific purpose. The law only imposes that tax on income up to about $107,000 per year because the tax is designed so that people “earn” a corresponding retirement benefit (which actually is tilted in favor of low-income workers).

Imposing the tax on multi-millionaire income, however, would mean sending rich people giant checks from Social Security when they retire. But nobody thinks that’s a good idea. Or you could apply the payroll tax to all income and not pay any additional benefits. But this would turn Social Security from an “earned benefit” to a redistribution program, which also is widely rejected (though the left has been warming to the idea in recent years because their hunger for more tax revenue is greater than their support for Social Security).

If we consider these two factors, Buffett’s effective tax rate almost surely is much higher than the burden on any of the people who work for him.

But this entire discussion is a good example of why we should junk the corrupt, punitive, and unfair tax code and replace it with a simple flat tax. With no double taxation and a single, low tax rate, we would know that rich people were paying the right amount, neither too much based on class-warfare tax rates nor too little based on loopholes, deduction, preferences, exemptions, shelters, and credits.

Donald Trump, in a conversation with John Stossel about how the rich will respond to higher tax on their income, frankly acknowledged that they will simply leave the country to avoid paying out more of their earnings.

“I know these people. They’re international people. Whether they live here or live in a place like Switzerland doesn’t really matter to them.” He continued, “I haven’t left yet…Look, the rich people are going to leave. And other people are going to leave. You’re going to end up with lots of people that don’t produce. And then that’s the spiral. That’s the end.”

Stossel argues that it’s already happening in places like Maryland and New York, where high earners have left the state, and Governor David Patterson confirmed that increased income taxes have resulted in far less than the projected $4 billion it was supposed to bring in. The bottom line: higher taxes do not typically yield increased revenue.

Art Laffer, famous for the Laffer Curve, is not surprised:

“It’s just economics,” [Laffer] says. “People don’t work to pay taxes. People work to get what they can after tax. They’ll change where they earn their income. They’ll change how they earn their income. They’ll change how much they earn, when they receive the income. They’ll change all of those things, to minimize taxes.”

Larry Gellman writes about the need to be honest about jobs and the economy, and to stop criticizing Obama’s bad economic policies, in his September 8th opinion piece at the Huffinton Post, where he calls on politicians and the news media to stop making rational conversation impossible by “filling the airwaves and print with so many lies and distortions.” Lies and distortions? God forbid that anyone would claim that wealth redistribution is an inefficient mechanism, or that increased taxes will diminish business output and further hurt the economy!

Apparently, even Forbes is guilty of such blasphemy: they argue that an expiration of 2001 and 2003 tax cuts will “sink the economy and kill any hope of a jobs-led recovery.” The U.S. Chamber of Commerce additionally noted that “the most important thing….for the economy is to take action immediately to prevent massive tax increases on America’s consumers and businesses.” With an expiration of the cuts, marginal income tax rates will increase for every taxpayer, as will dividends and capital gains tax rates. But according to Mr. Gellman, the “truth” is that rich people and CEO’s are responsible for high unemployment and the country’s economic woes in general.

Let’s be honest: yes, the economy was bad prior to Obama taking office, but the many-varied reasons for that extend far beyond the claims of the author and are the subject matter of another day’s blog post. However, the tax increases that Obama proposes, which are based on a stated wealth-redistribution philosophy, are empirically proven to lessen capital quantities, which in turn decreases demand for labor and the availability of jobs. The progression is logical: higher taxes, less money for reinvestment and labor, fewer available jobs, decreased purchasing power for the general population, and a continuously stalled economic recovery. Workers wind up bearing the bulk of the tax burden, not wealthy CEOs.

Contrary to Mr. Gellman’s belief, the majority of Americans are not confused about where the truth lies. They don’t need information to be “framed” in a particular way (the implication is that it must be suitable to liberal opinion); they are living the reality, and are smart enough to know that systemic disincentives to growth, such as higher taxes, needs to be adequately addressed. Making the nation’s shareholders and CEOs a scapegoat is far too simplistic, and borders on the irrational. Mr. Gellman, let’s be real when discussing jobs and the economy!

Economics professors Thomas Cooley and Lee Ohanian have found a significant parallel between the pending tax hikes and the 1930’s under FDR. Roosevelt’s rate hikes on capital gains and dividends did considerable damage to the economy before being rescinded. This lesson needs to be heeded:

…[I]n 1936, the Roosevelt administration pushed through a tax on corporate profits that were not distributed to shareholders. The sliding scale tax began at 7% if a company retained 1% of its net income, and went to 27% if a company retained 70% of net income. This tax significantly raised the cost of investment, as most investment is financed with a corporation’s own retained earnings.

The tax rate on dividends also rose to 15.98% in 1932 from 10.14% in 1929, and then doubled again by 1936. Research conducted last year by Ellen McGratten of the Federal Reserve Bank of Minneapolis suggests that these increases in capital income taxation can account for much of the 26% decline in business fixed investment that occurred in 1937-1938.

…FDR eventually abandoned the excess profits tax and decreased the tax rate on dividends, but only after they significantly damaged an already weak economy.

There is no reason why history must repeat itself. The capital gains and dividends taxes should not be raised – they should be eliminated.

While the Obama administration discusses additional stimulus packages, Treasury Secretary Tim Geithner is arguing that we should roll back key elements of the Bush tax cuts passed in 2001 and 2003. The administration is particularly skeptical about the benefits of today’s lower rates on dividends and capital gains.

…The administration’s arguments for higher taxes on capital center on fairness and the need for deficit reduction.

These arguments are seriously mistaken. The relationship between investment, capital and wages is such that workers are better off if capital is not taxed at all.

Think of the economy as a pie split among workers, savers and the government, with the government’s slice fixed. The savers’ slice will equal the after-tax return on each unit of the capital stock, and what’s left goes to workers as after-tax wages. The fairness advocates in effect claim that low tax rates on dividends and capital gains increase the share of the pie that goes to high-income savers. But the low tax rates increase the absolute size of the workers’ slice by making the entire pie bigger. That’s because low tax rates encourage capital accumulation, productivity and wage growth.

Visit our research page for more reasons why taxing capital is a bad idea.

Last week the Double Taxation Working Group sent a letter to Senator DeMint thanking him for his leadership on tax issues. His proposed amendment would have made permanent the current 15% rates on capital gains and dividends.

Sixteen members of the Working Group signed on to the letter, which can be found here. Here are a few quotes from Working Group members:

Andrew Quinlan, President of the Center for Freedom & Prosperity Foundation:

“Although his legislation failed to pass, Senator DeMint has demonstrated that he is willing to lead on this crucial issue.”

Dan Mitchell, Senior Fellow, Cato Institute:

“Many of America’s major trading partners have no capital gains tax because policy makers in those jurisdictions understand the importance of saving and investment. Unfortunately, class-warfare concerns trump growth for many American politicians.”

Duane Parde, President of the National Taxpayers Union:

“Washington already sent the wrong signal to a fragile economy by enacting a health-care law that will eventually raise the top tax rate on desperately needed investment activity. This is just one more reason why Senator DeMint’s efforts to keep capital gains taxes from rising further are so vital to a sustainable recovery.”

Grover Norquist ~ President, Americans for Tax Reform:

“The capital gains tax should be ‘zero’. There should not be any redundant layers of tax on savings. But at the very least, the 15 percent rate should not go up. Unfortunately, that’s exactly what Obama and Congressional Democrats propose to do in January.”

Karen Kerrigan, President & CEO, Small Business and Entrepreneurship Council:

“Senator DeMint’s leadership on this issue is greatly needed. Taxes on capital and savings harm small businesses, which rely heavily on investments to create jobs.”

“A capital gains tax hike will especially hurt small entrepreneurs with innovative ideas. Investors are much less likely to risk their money on the startup that could be the next Google or Facebook if the government takes more of their return should the venture be successful. “

James L. Martin, Chairman, 60 Plus Association:

“Dividends are an important source of income for seniors. Senator DeMint agrees with 60-Plus, as we are both committed to preventing seniors from being hit with an unnecessary tax increase on a key part of their livelihood.”

Larry Hart, Director of Government Relations, American Conservative Union:

“The failure of the economic policies of this Congress and the Obama Administration is now becoming evident in the pathetic private sector employment figures. As the American public becomes aware of this coming body blow to the economy in the form of higher taxes, the grass roots revolt we have seen so far will pale by comparison.”